Russian election: how might Putin’s inevitable victory affect the economy?
For Russia the risk lies not in Sunday’s election, but what comes after.
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At first it may not seem that an election in Russia qualifies as a source of political uncertainty. There is little doubt about the outcome of the vote on Sunday (18 March), given a net approval rating for President Putin of over 60%. All the same, we would not completely discount it as a political event.
For all that we may perceive Russia as an authoritarian state, it is still an authoritarian state which relies upon elections for a degree of credibility. Consequently, swings in the vote share will likely lead to changes in policy, and as in other democracies, elections can see painful policies forestalled.
In this light, it is interesting to note that the reform programme Putin tasked his former finance minister Alexei Kudrin with drawing up has been studiously ignored. Furthermore, during a press conference in December 2017, Putin stated that there would be no government changes until after the March election. Normally, significant changes would have already been announced.
There are two ways to read this. One is that Putin plans no changes and is happy with a business as usual approach, given that oil prices are stable and well above the minimum assumption in the fiscal budget. There is an argument that only crises will spark reforms in Russia, and there is certainly evidence to back this up. We believe this view is the dominant market perspective.
The more optimistic take would be that Putin is merely waiting for the elections to pass to begin enacting a set of painful but needed reforms. Proponents of this view would argue first that Putin would not have instructed Kudrin to come up with a reform programme if he did not intend to make use of it. Secondly, opinion polls show that Putin is not universally and constantly loved.
The chart above shows Putin’s net approval rating (variously as prime minister and president), and it is evident that opinion can turn against him, despite his lack of plausible opposition.
At the very least, it seems unlikely that policy will take a turn for the worse after the elections. Consequently, the elections seem to provide upside policy risk, although it will not materialise until after March.
As for downside risk, we would argue that this would manifest primarily as a weaker than expected vote share for Putin. A significant fall in popularity could translate to populism, either in the form of more generous social spending, or renewed foreign policy adventurism. Either carries risks to the fiscal outlook, in the case of the latter because it increases the odds of US sanctions against purchases of Russian sovereign debt.
The recent destabilisation of the UK-Russia relationship is unlikely to harm Putin’s performance in the polls. If anything, Russia’s response to date seems likely to deliver a stronger result for the incumbent president. Sanctions announced against Russia so far seem set to have limited macroeconomic impact, focused as they are on specific entities and individuals. Should sanctions escalate to the point that financial sanctions are imposed against the Russian sovereign, this assessment would change. At present, the US Treasury seems to be against such a measure, warning in early February that it could destabilise markets beyond Russia, though officials have not ruled it out.